When it comes to headline risk, loss of value surprises no one. But this Society has long advocated that among the benefits arising from superior intangible asset financial management is reputation resilience. In fact, it is one of the central themes in the Society’s recent book, Mission:Intangible. Managing risk and reputation to create enterprise value.

Reputation resilience is the benefit arising from having a company pre-position stores of goodwill on which it can draw when the headline crisis strikes. It means stakeholders will tend to feel a company’s pain and empathize rather than holding a company culpable.

Consider the remarkable reputational comeback of Toyota Motors (NYSE:TM). As shown in the first of two charts of the Steel City Re Corporate Reputation Index, Toyota’s ranking has zoomed back to the top of the automotive (motor vehicles) sector globally among its 35 peers from a start one year ago of 0.62. While it is currently underperforming the median of its 18peers in the automotive sector by 23% due to costs associated with its recent issues (and the subsequent pile on of litigators, regulators and mommy bloggers), its future prospects are good. Stakeholders are giving the company the benefit of the doubt in terms of pricing power, labor costs, credit costs and earnings multiples. Toyota built the capacity for reputational resilience over years of generally doing the right thing on six key fronts: ethics, innovation, quality, safety, sustainability, and security.



Now contrast Toyota with what we expect will be a long a steady reputation loss at BP (NYSE:BP). BP’s ranking has been sliding for the past year having started at the 87th percentile and finishing most recently at the 56th. BP, a firm that is no stranger to reputation issues, is currently underperforming its 51 peers in the integrated oil sector by 14% and, notwithstanding the bright colors of the chart, the future is not rosy.

Heads Up

1. Risk, governance, and compliance are the topics for this Friday’s Mission Intangible Monthly Briefing at 12h00 EDT. The program, titled Driving risk and reputation into the C-suite, is complimentary, and a sample download of a recent program is available to further pique your interest. For more information and registration, click here.

2. The book, Mission: Intangible is available from the Society and from other major online book retailers. The book is available in hardcover, softback and e-book versions. Society members benefit from a material discount if purchasing the book from the Society.

3. The Society will release next week regular data on the first-ever reputation composite index. Provided by Steel City Re, the data reportedly show that firms actively engaged in the process of reputation enhancement tend to outperform their peers. Spoiler alert: Since January 2005, the Steel City Re Corporate Reputation Composite Index of reputation rising stars has returned 18% while the S&P500 has lost 3%.

And of course, we extend to you an open invitation to join the Society as a full member; and to Link-In to the Society's regular chatter availabe conveniently through the Linked-In website and IAFS group membership. Join us.

It is water under the bridge, of course, but it is worth noting that insiders at Lehman (NYSE:LEH) thought that Repo 105 reeked of “headline risk.” And headline risk, as we have observed before, can snowball.

According to Jennifer Hughes writing in today’s Financial Times, Martin Kelly, global financial controller, warned his bosses about the “headline risk” to Lehman’s reputation if the deals were to become public. And now that the issue is public, it is snowballing.

Ms. Hughes further writes, “Lehman’s Repo 105s have attracted attention because attempts to hide assets by shifting them off the balance sheet are associated with dodgy accounting and best known for the interminable tangle of vehicles created by Enron, the failed US energy group, to hide its debts. But the reason this issue keeps rearing its head in so many guises is that the question lies at the very heart of accounting, which was originally intended to give a company’s owners a fair report of its business activities. Therefore, what goes on, and what stays off, the books is a permanent area of debate.”

Perhaps. But there is also a reputation angle to this story. In our opinion, the reason this issue is rearing its head and snowballing with the inevitable pile on of ‘litigators, regulators and Mommy bloggers’ is that it speaks to a central driver of market liquidity—trust. As former Fed Chairman Greenspan noted in October 2008, in a market system based upon trust, reputation has significant value. Linking ‘trust’ to ‘reputation’ is the ephemeral intangible asset of ‘ethics,’ for which accountants have yet to find a home.

Which is not to say that ‘ethics’ does not impact financial statements. As reported in the Intangible Asset Finance Society’s latest book, Mission: Intangible, companies with superior reputations deliver superior long-term shareholder returns by enabling (i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta and (v) lower credit costs. And as for companies that do not foster conformance with ethical best practices, there are always alternatives to being a going concern. Just ask Lehman.

The IAFS launched its 2010 membership drive this past week. This is why. On February 28, new US SEC regulations will drive into the boardrooms risk, reputation and intangible asset management. 

You have a decision. Will you be at the table or on the menu?

These regs mean that every board member, in fact every top executive, can expect major new challenges. Members of the Intangible Asset Finance Society (IAFS) will be prepared. Here’s how:

1. Thought Leadership. The IAFS is the only interdisciplinary Society of professionals committed to the financial exploitation of intangible assets. That translates into enhanced pricing power; lower operating and credit costs; and higher net incomes and earnings multiples.

2. Risk Management. A lost reputation can destroy a firm overnight. IAFS can keep you up to date with risk management strategies for ethics, innovation, quality, safety, environmental sustainability, and security.

3. Preferential Pricing. Society members receive preferential rates for IAFS products at our new store and discounted registration to various professional meetings. Discounted registrations for the March ICAP Ocean Tomo meeting in San Francisco and the June IP Business Congress in Munich, for example, are now offered.

4. Incentive Premium. Sign on for your academic or corporate membership including payment by March 15 and receive a complementary copy of the IAFS’s latest book, Mission: Intangible. Managing risk and reputation to create enterprise value (a $29.95 value).

Click here to learn how our strengths in Thought Leaders and Risk Management, financial benefits such preferential pricing, and premiums such as the book shown at right make joining the Society today an offer you can't refuse.

“…it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

True or false: Finding himself unable to keep his fly in the full, upright, and locked position, Tiger Woods’ ethical downfall precipitated reputation-associated losses on the order of $12 billion by his sponsors?

FALSE. The Steel City Re Corporate Reputation Index shows no evidence of headline risk effects.

On 28 December 2009, Christopher R. Knittel and Victor Stango posted on the web their study, Shareholder Value Destruction following the Tiger Woods Scandal. These economists, associated with both the University of California, Davis, and NBER, reviewed the market behavior of six public sponsors of Mr. Woods—Accenture (NYSE:ACN), AT&T (NYSE:T), Nike (NYSE:NKE), Gillette (NYSE:PG), Electronic Arts (NASDAQ:ERTS) and Gatorade (NYSE:PEP). Using an ‘event study’ method, they concluded that shareholders of companies that Mr. Woods endorsed lost $5-12 billion in wealth between 27 November and 11 December. The authors imply headline risk as the proximate cause.

We disagree. While there were some market cap losses and fewer gains, we see no evidence of consistent decreased reputation metrics among the sponsors. Using tools described briefly at Steel City Re, and in more detail in the forthcoming book, Mission: Intangible. Risk and reputation management to create enterprise value, we see no change in reputation rank trends over the relevant two week window. We share exemplary Steel City Re Corporate Reputation Index metrics for four (4) of the companies alleged to have suffered the consequences of headline risk.

First, AT&T rewarded its shareholders over this period with a positive bump, although it was not as significant of a bump as the median of its 57-member peer group. Its Reputation Index also showed a small positive bump ending the period at the 92nd percentile. The bottom line: better reputation metrics over the critical period.


Second, Accenture and Nike showed no movement in their reputation metrics. In the charts showing the Reputation Index and its exponentially weighted moving average volatility for the past six months, Accenture is flat at the 94th percentile and Nike is flat at the 100th percentile. The bottom line: no change in reputation metrics over the critical period.



Last, in the chart showing both the Reputation Index for Electronic Arts and the both the median and variance of the index measurements for the Software Group sector, three things are apparent. First, Electronic Arts’ Reputation Index ranking continued its downward trend during the critical period. Second, the median reputation ranking for the entire sector slid over the course of the entire year. Third and last, there is much volatility in the variance of the index rankings in this sector. The bottom line: weaker reputation metrics over the critical period reflecting continuation of a year-long trend.


The data suggest that in this instance, the downfall of an iconic spokesperson generated significant press, much speculation, but ultimately nothing untoward with respect to his sponsors. Bottom line: No headline risk seen. Goodbye Tiger. Hello elephant and frog.

Six weeks have passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC).

Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness. Last month, we hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Once again, Society member Jim Singer of the Pepper Hamilton law firm and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 9/3/2009-11/22/2009. The first search was for the pairing of “Galleon OR Rajaratnam.” Jim then searched the resulting articles for the additional terms of McKinsey, IBM, or Intel. 

There were no citations meeting the search criteria prior to the government announcement of allegations. Following the announcement, the data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant for the first three weeks of the alleged scandal.



While the findings are not conclusive—McKinsey is privately-held whereas the other two are public—these data are consistent with our general observation that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test for the five weeks of data yields a p<.03, p<.001, p<.01, for the first three weeks, respectively, and then not statistically significant differences thereafter.

Thirteen days have now passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. The fund has liquidated about 90 percent of its nearly $3.7 billion portfolio of technology stocks and other securities and will be consigned to history, shortly. 

Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC). Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness.

We hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Society member Jim Singer of the Pepper Hamilton law firm, and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 10/1/2009-10/29/2009. The first search was for the pairing of “Galleon and Rajaratnam.” Jim then searched the resulting 112 articles for the additional terms of McKinsey, IBM, or Intel.



The data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant. It is consistent with our general contention that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test yields a p<.03 (statistically significant).

Of the various companies caught up in the Galleon Hedge Fund matter, the headline that caught our attention was from Reuters and exclaimed, “McKinsey shocked by insider-trading allegations.” It has a whiff of Claude Rains, in the role of Captain Renault, expressing shock at the gambling in Casablanca. This is why.

One one hand, McKinsey has strict standards barring its consultants from trading stocks or funds that relate to the companies they are advising, a source close to the company said. The company's partners sign off each year on the policies. On the other hand, according to the Reuter’s story, McKinsey was aggressively recruiting college graduates by offering them new investment options, including getting a stake in a pool of McKinsey clients that gave the firm equity instead of cash for their consulting services. “A slippery slope,” says Lawrence White, a professor at the New York University's Stern School of Business.

McKinsey is looking at headline risk. The Financial Times' Newssift sentiment index reports that for the past week, the 9 article in the business press on McKinsey that included the word reputation were evenly divided at 33% each positive, negative, and neutral giving a positive/negative ratio of 1.0. For the month before the scandal broke, of the 11 articles, four were positive and two were negative for a p/n ratio of 2.0. (For comparison, Johnson & Johnson (NYSE:JNJ), the reputation leader for early 2009, had a one-year p/n ratio of 8.3)

Ironically, earlier this year, consultants from McKinsey authored an article on the importance of reputation management. The article called for substantive business process controls, and highlighted the limitations of public relations. Perhaps this is why McKinsey, so far, has been tight lipped?

Former Fed Chairman Greenspan noted last year that in a market system based upon the intangible asset of trust, reputation has significant value. Madoff aside, trust is having a hard time on Wall Street. We share two recent stories of reputation malignment (vilification?) in the Financial services sector.
 
The first, reported by the Financial Times last Thursday, is that one in five hedge fund managers misrepresents their fund or its performance to investors during formal due diligence investigations, according to research from New York University's Stern School of Business. Researchers found that the most common misrepresentations by hedge fund managers was the amount of money they had entrusted to their funds; Performance and regulatory and legal histories are also often misrepresented.
 
The second, which broke widely on Friday, involves allegations of trading on insider information at the hedge fund, Galleon Group. According to prosecutors, co-conspirators of fund founder Raj Rajaratnam include a McKinsey & Co. consultant, an IBM (NYSE:IBM) senior vice president, an Intel Corp. (NASDAQ:INTC) treasury manager and two executives from the New Castle hedge fund group of the defunct Bear Stearns.

The reputation angle obviously interests the Society. But there is more. What really interests us is how McKinsey, IBM, and Intel will manage the headline risk. Will their intangible asset risk management systems allow them to characterize the malfeasance as the product of rogue actors? Or will they be held culpable for the non-compliance of their employees?

Stay tuned.

We all know instinctively, if not by experience, that five minutes of headline risk can destroy years of reputation building. The IAFS is interested in the business processes that build reputation, the processes that transform perceptions into reputation, and how that value can be maximized. We focus on the intellectual properties that comprise business processes for innovation, safety, security, ethics, sustainability, and quality. We focus on artifacts of these processes, such as patents and trademarks, and we focus on metrics.

While the most important commercial metrics are financial, there are leading indicators of reputation that inform on reputation development through its value chain. That value chain is discussed in an article in issue 36 of the journal produced by the Society's publication partner, IAM magazine, IA Metrics for the Other IP Market. The value chain schematic from that article is reproduced below.





Today's note calls our readers' attention to a metric of public impression comprising, as shown above, "media tone." The source of the media tone metric is the Financial Times' new product now in beta, Newssift. From a recent Newssift blog, we provide a link, without addtional comment, on the FT's media tone metric, sentiment, as used to report on the retail sector.

To recap the leader of the most recent FT/Newssift blog, "How are discount retailers weathering the economy? Fresh on the heels of news that Wal-Mart missed its sales expectations, we’re using Newssift to explore sentiment in the discount retail sector."

For those who have participated in the Society's monthly call, Mission:Intangible Monthly Briefing, you will appreciate that the above fits well with our summer-of-metrics theme. Comments on the FT media tone instrument are welcome.

We dedicate most of the time and effort of this communication channel to a discussion of the intangible assets that underpin reputation. Usually, the subject matter involves corporate behavior.  Awareness of issues associated with corporate behavior may come to light because of government regulatory action. More often, it is the result of NGO-driven publicity. In a break with tradition, the subject of today's note comprises NGO transparency. 

An on-line Wall Street Journal op-ed posted earlier this week alleged that Human Rights Watch, a 30-year old NGO dedicated to defending and protecting human rights, sent its leading Middle East official, Sarah Leah Whitson, to extract money from potential Saudi donors by bragging about the group's "battles" with the "pro-Israel pressure groups." The ongoing dialogue appears to affirm the allegations.

NGOs are important actors in both the geopolitical and commercial worlds. They encourage and monitor corporate compliance with many of the best practices comprising key business processes that underpin reputations for ethics, safety, and sustainability. They are respected and feared by much of the business community. Their primary tool is the threat of headline risk. Their moral authority depends on their reputation for independence. Their value is ephemeral. Loss of reputation and moral authority can be catastrophic.

Ronelle Burger and Trudy Owens from the University of Nottingham recently published a study that was motivated by “widespread calls for NGOs to become more accountable and transparent.” They conclude that “… NGOs with antagonistic relations with the government may be more likely to hide information and be dishonest.“

Human Rights watch has an antagonistic relationship with the Israeli government. The Israeli government wasted no time questioning HRW's "moral compass. "

Quis custodiet ipsos custodes?